Student loan repayment: How to best position yourself

The debt deal working its way through Congress will put an end to the pause in student debt loan repayment. When those loans have to be paid again, it could have a big impact on borrowers budgets. Wealthstream Advisors Financial Advisor Katharine George joins Yahoo Finance Live to explain how borrowers can adjust their budgets to accommodate the payments.

Video Transcript

JULIE HYMAN: Well, student loan payments are set to return in September as part of that debt ceiling deal. So how can loan holders readjust their finances for the extra cost? Joining us now is Katharine George, Wealthstream Advisors financial advisor. And this segment is sponsored by FlexShares. Katharine, thanks for being here. I mean, people have a lot of different debts that they have to deal with when doing their financial planning. Student debt seems especially insidious, right? At least reputationally, certainly. So there were people who had gotten used to not paying this stuff for a little while, what do they do now? How do they sort of make room for that?

KATHARINE GEORGE: Right. It is a big shock to the system. We have been on pause for three years, which is really crazy to think about. So it has not been top of mind for our everyday life. The most important thing is to come up with a plan ahead of time. So in anticipation that these payments are going to start back up, really take a look at your budget and see where you're spending, where you might be able to cut back, and how you can fit that in.

And if you don't see any room, really do a deep dive on what repayment options are available to you, because there are some flexibilities in how you'll be able to pay that back as opposed to other types of debt that you have. There is a bit more flexibility. But the most important thing is to come up with a plan ahead of time and feel prepared and not panicked.

BRAD SMITH: Are there any available kind of loan forgiveness programs, or even cancelation programs that people might be eligible for?

KATHARINE GEORGE: So there are, and it's extremely nuanced. And you read articles that even people that have followed the rules and done all these things sometimes still have trouble getting accepted into those programs. So you really have to do a lot of research in making sure that you're taking the necessary steps to do that correctly. But then of course, we have Biden's proposal to forgive student loan debt for everybody, which we don't know where that's going to go.

So before you're making any large chunks of payments to those federal student debts, I'd wait to see how that all shakes out and if we'll be able to get mass forgiveness of student loan debt. But even thosE-- the repayment options, if you don't have a high income or if you have a temporary layoff from a job, you should be able to get some exceptions and pause your payments for a period of time while you get back on your feet. So there's lots of options and lots of research to do there.

JULIE HYMAN: And it sounds like, Katherine, you're even saying that maybe you pay off the minimum required until it gets resolved by this proposal that the Biden administration is making for the longer term?

KATHARINE GEORGE: Exactly. And even if this doesn't get passed through, oftentimes, student loan debt interest rates are much lower than the other debt that we hold elsewhere. The good news about student loan debt is that if you have it today, and you graduated a few years back, those interest rates are at lower rates than we are today.

So it will be significantly lower interest than what you're paying on your credit cards, any other personal types of loans, if you just got a new mortgage, all of these rates are substantially higher than what our student or federal student loan payments might be. And we're able to earn money on cash now. So really comparing what I'm earning on my high yield savings account versus making that extra payment to the federal student loans, all of that's a big factor.

BRAD SMITH: You mentioned a key word within there, and that is federal. The majority of these student loans are federally held. So what about for those who have private lenders. What recourse, what negotiation can they put forward?

KATHARINE GEORGE: So that is-- it's really tricky because every service provider can be very different in how they handle you not paying your payments or what options they might provide. So there's a little bit more research to do there. But generally, the interest is much higher on the private side when we compare the federal side. However, there are companies that will consolidate debt and offer you lower rates than what you're paying today. But again, it takes some research, understanding how that impacts you and the monthly payments. There are some options, but it is trickier than the federal side.

JULIE HYMAN: I'm also curious when people are looking at their various debts. How they should be prioritizing them in terms of-- in what order they're going to pay them off versus of course, whatever they're allocating to investments, et cetera?

KATHARINE GEORGE: So as I mentioned before, the federal student loans likely have much lower interest rates. So it's really not a bad debt to have for a couple of different reasons. The first debt to focus on is definitely credit card debt. The interest rate that you pay on that debt fluctuates with interest rates and the interest rate environment. And as we know, those rates are going up, and we don't know when that will stop.

So the rates are extremely high to borrow from credit card companies, and that's the number one place to start. And then any other private types of loans that you might have is the second. And then federal student loan is likely that last tranche. But when we think about it compared to whether we pay off debt or build a cash reserve or we invest our money, it's really you should get some advice from a professional.

But generally speaking, I would pay off that credit card debt before you build a cash reserve, because you're paying a lot to borrow. And then, really do the minimum payment on that federal student loan. And if you have any extra, you can start to build a cash reserve. If you have a cash reserve, then you can start to invest in your portfolio. But really, feeling secure before you put any money at risk in a stock and bond market.

BRAD SMITH: Is there a general rule of thumb, Katharine, if just still holding on to student loan debt, but at the same time you say, you know what, I've saved up for a house that I'm trying to get approved for and perhaps, that's a better place to try and at least get approved, put forward, and go forward with the process there. Is there a general rule of thumb, a first thing that people should keep in mind when they are trying to balance that decision making?

KATHARINE GEORGE: So buying a home right now is also tricky as we're talking about these interest rate rises. A 30-year mortgage can be 6%, 7% to borrow. And of course, prices are really high, and many home markets. But with that being said, of course, buying a home is an investment and also a place just for you and your family to live. So in terms of paying off federal student debt or going through this process of buying a home, as I mentioned before, federal student debt is not bad debt per se.

And generally, the rates are lower. So I would not start with that start with paying that off. I would live your life and pursue a home, investment, building cash, before you fully pay down that student debt, especially with this Biden forgiveness program floating over our heads without any clear deadline.

BRAD SMITH: All right, Katharine. I've been taking furious notes over here. Katharine George, Wealthstream Advisors financial advisor. Thank you so much for joining us here on the day appreciate it.